Palm oil stockpile declined further, 2.1% MoM to 1.52m tonnes in Feb-22, as lower opening stocks, imports, and output (as a result of seasonal factor and persistent labour shortage) more than offset a 5.3% decline in exports. Maintain 2022-24 CPO price assumptions of RM4,300/3,300/3,300 per tonne. We believe palm oil prices will remain at elevated levels (possibly until 1H22). We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from elevated CPO prices) and commendable valuations. Top picks are FGV Holdings (BUY; TP: RM2.43), IOI Corp (BUY; TP: RM5.01), KLK (BUY; TP: RM32.43), and Sime Darby Plantation (BUY; TP: RM5.95).

DATA HIGHLIGHTS

Stockpile continued to trend down. Palm oil stockpile remained on downtrend (for the fourth consecutive month), declining by 2.1% MoM to 1.52m tonnes in Feb-22, as lower opening stocks, imports, and output more than offset a 5.3% decline in exports. The stockpile came in above Bloomberg consensus median estimate of 1.35m tonnes, due mainly to lower-than-expected exports.

Lowest output since Feb-21. Total output fell for the fourth consecutive month, by 9.3% MoM to 1.14m tonnes in Feb-22, due mainly to seasonal factor (i.e. shorter working days) and persistent labour shortage.

Exports remained on downtrend too. Exports fell for the third consecutive month, by 5.3% MoM to 1.1m tonnes in Feb-22, dragged mainly by lower exports to India (-18.3%) and EU (-8.2%). While exports to China picked up by 17.2% MoM to 88k tonnes in Feb- 22, this was due mainly to the low base effect. We believe lower exports to key destinations were due mainly to seasonal factor (as winter season typically slows palm oil demand from China) and demand destruction arising from high palm oil price.

Exports for the first 10 days of Mar-22. Preliminary data from independent cargo surveyor Amspec indicated that palm oil exports rose by 15.6% MoM to 370.5k tonnes during the first 10 days of Mar-22.

HLIB’s VIEW

Forecast. Maintain 2022-24 CPO price assumptions of RM4,300/3,300/3,300 per tonne. We believe palm oil prices will remain at elevated levels (possibly until 1H22), supported by (i) weaker production outlook for corn and soybean in South America, (ii) Indonesian government’s recent move to expand its export permit requirement for all palm oil products including derivatives, which will likely disrupt palm oil supply chain, and (iii) geopolitical tension, which will likely result in protracted fertiliser supply (which may result in planters (in particular smallholders) reducing fertiliser application to oil palms, hence derailing the anticipated yield recovery. Over the longer term, we continue to believe that a pullback in CPO price will materialise when palm oil output recovers, which in turn hinges on the entrant of foreign workers into Malaysian shores.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from elevated CPO prices) and commendable valuations. We take this opportunity to downgrade our ratings on Hap Seng Plantations and TSH Resources to HOLD (from Buy earlier), as upside has diminished following recent share price performances. Top picks are FGV Holdings (BUY; TP: RM2.43), IOI Corp (BUY; TP: RM5.01), KLK (BUY; TP: RM32.43), and Sime Darby Plantation (BUY; TP: RM5.95).

Source: Hong Leong Investment Bank Research - 11 Mar 2022